13 July, 2015

Eurozone is ready to explode, but probably not for the reasons you think

globinfo
freexchange

Wolfgang
Schäuble and the German leadership of the eurozone have good reasons
to worry, maintaining an uncompromising attitude in the negotiations
with Greece. But the repayment of Greek debt, which amounts to EUR
317 billion, is not one of the most important ones. The Greek debt is
insignificant in comparison with the financial dynamite of the German
(and other) banks, which in recent months gives more daily ignition
signs.

Only
Deutsche Bank, the largest bank in Germany, is significantly exposed,
holding dubious financial products known as "derivatives",
worth 67 trillion euros. This amount is similar to the GDP of the
entire world and 20 times greater than the GDP of Germany. Any
comparison with the situation of the bank Lehman Brothers in 2008
would not be irrelevant. Just when Lehman Brothers went bankrupt, had
available derivatives of only 31.5 trillion. The crisis of 2008
confirmed the concise definition of derivatives as proposed by the
American tycoon Warren Buffet: "financial weapons of mass
destruction."

2008 may now
be a past, but recent developments are particularly bleak for
Deutsche Bank. The competent authorities of the US and Britain
imposed on the bank in April a fine record (which, together with a
previous fine, are EUR 2.2 billion in total) for fraudulent interbank
rates. In early June, two co-CEOs suddenly resigned. Four former bank
executives had been prosecuted by the German judicial authorities for
false statements and misleading testimonies. A few days later,
prosecutors raided the bank's offices in Frankfurt to collect
customer data.

At the same
time, financial products are becoming daily more precarious.
Immediately after the announcement of the failure of the negotiations
between Greece and the "institutions" on June 12, the risk
of eurozone bonds recorded vertical rise. The German ZEW economic
outlook index fell on June 16 for the third consecutive month, and
has fallen by 43% in three months.

Admittedly,
Germany is no exception. Other countries have similar problems, such
as Austria, Netherlands and Finland. But these are minor compared to
the size of the risky investments of Deutsche Bank.

In view of
the above problems, a possible Greece's stance of payments should not
be of particular concern in the eurozone, especially when it has
repeatedly announced that the "institutions" have ready
plans to handle a potential Grexit. But perhaps the intensive efforts
of the German leadership, highlighting the crisis of the European
periphery economies (Greece, Spain etc.), as the main problem of the eurozone, are simply a smokescreen to cover the inherent instability
of the financial system. Because as the developments have shown so
far, the primary objective of European leaders is to protect banks.

When a giant
bank must get rid of "junk" bonds or to obtain additional
liquidity, turns to the ECB. Immediately before the PSI, the ECB
helped Deutsche Bank, among others, to sell at a good price the
"toxic" Greek bonds, which are now held by the ECB, which
of course is backed by European taxpayers. The Deutsche Bank and the
other banks had relatively insignificant losses from PSI, in contrast
to the Greek pensioners. And since the banks did not failed, they
didn't have to learn any lesson, convinced that the leaders of
northwestern Europe would not leave them helpless in a similar
situation in the future.

This
situation is coming closer every day, and even a small jolt of the
bank boat (a Greek default), can have unintended consequences, such
as an uncontrolled chain bankruptcy. Because if something goes wrong,
the Deutsche Bank, like most banks, is able to cover only a small
part of "derivatives" and other toxic products held.

Therefore,
Mr. Schaeuble, Mrs. Merkel and the other "tough guys" of
the eurozone have every reason to worry. Of course, the real reason
for their concern and their intransigent attitude can not be the
Greek debt, which corresponds to 0.5% of the derivatives possessed
only by one German bank, but the insecurity created by the
possibility of the financial paper tower turbulence.

For the
German leadership, the Greek crisis is a convenient scapegoat to
divert attention of the European public from the painful reality. The
tough stance of lenders to Greece and the countries of the periphery
of Europe notably aim at avoiding two undesirable developments.
First, a shaking of the market, which can cause a default or a
deletion of part of the Greek debt. Second, a series of concessions
to Greece, which will threaten the European neoliberal establishment.
But when the bank boat starts sinking, the adaptation of the Greek
passengers to the captains' orders cannot by itself prevent the
sinking.

The Greek
negotiators probably know a lot more than the usual accusations by
their interlocutors and the "institutions", who use
Orwellian tactics to present as 'inexperience' the thorough negation
of Greek side to adapt in a flimsy financial framework.